Thread: Questions to Ask a Lender

I am starting my adventure into RE as an investor. I want to get a MFH or a townhouse with financing. I have a family friend RE agent that knows the local markets. I have read some books and seem to have a basic understading of the metrics to judge a deal on. I am concerned with what to ask a lender as I shop around for loans from an investors perspective. Obviously I know to ask for loan requirements and from what I know so far I'm able to meet them.

What other questions should one ask the lenders when they are interviewing lenders for financing?

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To start with, you'll need to know what is the max LTV they will go up to for the type of property you are buying, depending on how much you plan on putting down. Also, how much you will need in reserves. How many mortgaged properties you are allowed to have. Are you putting these in your personal name or an LLC? If LLC you will be subject to commercial terms, which are not usually as favorable as in personal name. Just be prepared to show a LOT of documentation that they will need.

Sharky pretty much hit the nail on the head.

As a mortgage loan officer myself, typically as an investment property you are going to need to show at least 20% down, the rate is going to be adjusted by 1-3% because it is an investment property, and I know some lenders require you to pay a point as well (my institution does). Typically, lenders will allow you to have 1-4 rental units (if your income can support it) on the residential side. If you plan on getting more rentals, it would be wise to set up an LLC because the commercial side takes over because your main source of income is from rentals.

Thanks for the responses. I talked to one loan officer today that my RE agent referred me to. She requires 0.75-0.8 LTV which is normal and a loan >=$40,000. Rates between 4.87% - 5%.
I forgot to ask about the LLC requirements and the reserve requirements, but I will call back and get an answer. She really loved to talk. I'm familiar with the filing, taxing, etc from my current LLC and am reading about the proper structuring for holding multiple rentals.

From the loan perspective, it really doesn't seem all that different at this point then buying my personal home.

Hello all, I appreciate the advice.

Over the past week I identified a broker I want to work with and have formed a relationship with a RE agent that caters to investors, whom is also a family friend. I've come up with somewhat of a plan that I would like to use.

I am targeting only multifamily homes, between $75k and $125k in lower-middle class areas, which might be move-in ready or might need a little fix up. I really am aiming for a fourplex that falls in that range with a cap rate >12. I am in the process of identifying one right now that I would like to purchase. I have 4 or so in mind. With the owner provided numbers, I am looking at cashflow before taxes around 800-1200/month. I am looking for long-term holdings that cashflow at this point over appreciation.

My reasoning for buying a four plex is that 1: it allows me to spread vacancy risk out over the 4 units. There is a much lower probability that all 4 will be unoccupied concurrently then a SFH. This will allow me to work on one or two units at a time without taking the full hit on cashflow. 2: I figure that renting is analogous to riding in a taxi: you get in and pay a base fee no matter how far you travel. The cost of getting into a unit as a renter always has a certain base price which increases with size, class, amenities, and area. I would like to maximize the amount of units I own to capture that base charge. I think there is a point where rents i.e. cashflow, is maximized with respect to size, class, amenities, and area; of which characteristics are reflected in the value of property.

I'm looking to buy my first (rental) property after the new year and another around summer of 2012.

Your plan sounds very similiar to mine. Good luck with your process and keep us posted.

To the person who was a mortgage lender, I want to invest in numerous single family homes, and I noticed
you said that they cap at 5. What options do I have to go beyond this threshold provided I have the capital,
most if not all the properties cash-flow

Thanks

@rsteele: At least where I am at, after financing 4 SF residences, you would then be considered a commercial customer (because a majority of your income is from rental properties) any other financing would be done on the commercial side, not residential. I am not sure on the rules and laws in other states but this is how it works where I am at. Hope this answers your question.

So by being on the commercial side what exactly does that mean? Thanks in advance for the response

Originally Posted by rsteele

To the person who was a mortgage lender, I want to invest in numerous single family homes, and I noticed
you said that they cap at 5. What options do I have to go beyond this threshold provided I have the capital,
most if not all the properties cash-flow

The guidelines on this change periodically, so it may have changed but nevertheless they typically limit you to 4 financed properties plus or including your primary residence. I have known some local banks that don't sell their paper to Fannie Mae and Freddie Mac and portfolio the loan themselves to finance up to 10 and sometimes more.

Another option is to find a private individual to finance the properties for you. This can be done thru self-directed IRA's with places like Equity Trust, Entrust, etc. I have done this in the past as the lender and works out very well for both parties so long as you are credit worthy. The good thing with this is that it won't show up on a credit report either.

Originally Posted by T&R

Hello all, I appreciate the advice.

Over the past week I identified a broker I want to work with and have formed a relationship with a RE agent that caters to investors, whom is also a family friend. I've come up with somewhat of a plan that I would like to use.

I am targeting only multifamily homes, between $75k and $125k in lower-middle class areas, which might be move-in ready or might need a little fix up. I really am aiming for a fourplex that falls in that range with a cap rate >12. I am in the process of identifying one right now that I would like to purchase. I have 4 or so in mind. With the owner provided numbers, I am looking at cashflow before taxes around 800-1200/month. I am looking for long-term holdings that cashflow at this point over appreciation.

My reasoning for buying a four plex is that 1: it allows me to spread vacancy risk out over the 4 units. There is a much lower probability that all 4 will be unoccupied concurrently then a SFH. This will allow me to work on one or two units at a time without taking the full hit on cashflow. 2: I figure that renting is analogous to riding in a taxi: you get in and pay a base fee no matter how far you travel. The cost of getting into a unit as a renter always has a certain base price which increases with size, class, amenities, and area. I would like to maximize the amount of units I own to capture that base charge. I think there is a point where rents i.e. cashflow, is maximized with respect to size, class, amenities, and area; of which characteristics are reflected in the value of property.

I'm looking to buy my first (rental) property after the new year and another around summer of 2012.

Have you every managened a rental property before? I understand your logic with owning a four plex, with spreading risk, but that also means four times as many things that can go wrong. For example is each unit have its own H2O meter, if not that means your going to have to include water. What about heat and water heaters? Are you going to have 4 separate water heaters or maybe 2 80 gallon units. If you have one central heater for the whole building and it goes dead in the middle of winter, guess what, your going to have 4 really pissed off tenants. Finally you have to manage 4 tenants and not 1. I'm not trying to discourage you at all, I just think you should look at all the angles.

Good luck and let me know if you need anything. Roc

Originally Posted by roc

Have you every managened a rental property before? I understand your logic with owning a four plex, with spreading risk, but that also means four times as many things that can go wrong. For example is each unit have its own H2O meter, if not that means your going to have to include water. What about heat and water heaters? Are you going to have 4 separate water heaters or maybe 2 80 gallon units. If you have one central heater for the whole building and it goes dead in the middle of winter, guess what, your going to have 4 really pissed off tenants. Finally you have to manage 4 tenants and not 1. I'm not trying to discourage you at all, I just think you should look at all the angles.

Good luck and let me know if you need anything. Roc

I have never managed a property before. The property I have under contract has a master water, which is paid with trash and accounted for in income/expense sheet. A master water meter is common for this type of building in Phoenix. There is four seperate water heaters. The heating and cooling units are seperate between apartments, and the A/C is the big worry, not heat. The previous owner has recent documented servicing of them. I know that there is 4 tenants which could equal 4 times the headache, but I have decided to accept this risk and make it work. I am only 24 but I have read of many stories on this forum where people started with a building like this and made a life out of doing it over and over so I am going to learn while I have the opportunity (weak RE market and cash in hand). I also have family in the area which will assist if needed in repairs, etc. I am not against shopping out property management, but its only one building and I need to learn how to do it first. Please see my other thread for the actual progress.